RBI/2009-10/372
DBOD. No. BP.BC. 84 /21.06.001/2009-10
March 31, 2010
The Chairman and Managing Directors/
Chief Executive Officers of
All Commercial Banks
Dear Sir
Implementation of The Standardised Approach (TSA) for
Calculation of Capital Charge for Operational Risk
Please refer to our circular DBOD BP. BC. 23/21.06.001/2009-10 dated July 7,
2009, inter alia advising banks that they can apply for migrating to The
Standardised Approach and Alternative Standardised Approach (ASA) for
Operational Risk from April 1, 2010 onwards.
- The Basel II Framework presents three methods for calculating operational
risk capital charges in a continuum of increasing sophistication and risk
sensitivity: (i) the Basic Indicator Approach (BIA); (ii) the Standardised
Approach (TSA); and (iii) Advanced Measurement Approaches (AMA). A bank
following BIA can switch over to the AMA directly. However, as banks are aware,
all the qualitative requirements relating to operational risk management
applicable to TSA form part of the qualitative requirements for AMA. Therefore,
if a bank does not have plans to switchover to AMA before 2014, it may first
consider moving to TSA so that the work done by it in implementation of TSA
could be used to meet part of the requirements for AMA as and when the bank
considers switching over to that approach. Also, the banks which already have
three year data of gross income of different business lines may also first
consider implementing TSA.
- The guidelines on TSA/ASA, largely based on BCBS document, ‘International
Convergence of Capital Measurement and Capital Standards; June 2006 (Basel II),
are furnished in the
Annex.
- The basic methodology of calculation of capital charge for operational risk
remains the same as in case of Basic Indicator Approach (BIA) in as much as the
exposure indicator for operational risk continues to be Gross Income. However,
in TSA there is a requirement of mapping the activities of a bank into eight
business lines as indicated in Appendix 1 of the guidelines. In addition, banks
also have to meet minimum standards for management of operational risk including
capturing of operational loss data for individual business lines as indicated in
the guidelines.
- The banks interested in migrating to TSA/ASA for operational risk capital may
approach RBI (DBOD) with a formal application after March 31, 2010, with a write
up in support of their compliance with the provisions of the guidelines
furnished in the Annex. It may be reiterated that banks would have the
discretion to adopt TSA/ASA, while continuing with simpler approaches for
computation of capital for credit and market risks.
Yours faithfully
(B. Mahapatra)
Chief General Manager